Plan for the Future with a Structured Celebrity Endorsement

Those in the sports and entertainment industry are hard workers. They have to be. Success does not come easy in such a fast-paced industry, and when one does achieve fame, there is not always a wide window to capitalize on it. During these periods of boom and bounty, celebrities and athletes should take the time to plan for the future. The Internal Revenue Code can help in this endeavor. Entertainers who receive substantial endorsements may be able to defer their endorsement income into future tax years. Not only does this provide them with a steady stream of income for years to come, but it helps keep tax rates low both now and into the future. This option in the IRS tax code is often called a “structured celebrity endorsement.”

Structured Celebrity Endorsement: The Basics

Internal Revenue Code Section 409A titled Inclusion in Gross Income of Deferred Compensation under Non-qualified Deferred Compensation Plans is a mouthful, but the idea is fairly straightforward. By structuring an endorsement agreement as a non qualified deferred compensation plan, celebrities and athletes can elect to receive their compensation in a future year or over a series of years without having to pay taxes on the income today. Here is how it may work:

STEP 1:   In 2020, Joe Athlete agrees to endorse his favorite brand of tennis shoes over a period of a few months, payable in one lump sum later that year. Joe currently earns enough as an athlete to live comfortable and is not in immediate need of this revenue. He wants to save his endorsement revenues for future years when his athletic career comes to an end. To do this, he negotiates with the tennis shoe brand to pay into an annuity rather than to him directly. This annuity is structured to release his endorsement revenue the year he turns 50, paid in equal monthly installments over the next ten years.

STEP 2:   When Joe completes his endorsement campaign, the tennis shoe brand pays the endorsement fee directly to the annuity, which is typically overseen by a reputable life insurance company.

STEP 3:   At the end of 2020, even though Joe has earned his endorsement fees, he receives none of the cash, and he does not have to pay tax on this revenue.

STEP 4:   When Joe turns 50, he begins to pull from his annuity. Each year, he pays taxes on the amount he receives. Because the annuity has earned interest over time, the interest is also taxable to Joe when he pulls it from his annuity.

Benefits of a Structured Celebrity Endorsement

These deferred compensation plans are not new. However, when Section 409A was added to the tax code in 2005, deferred compensation plans could be used for nonqualifying purposes – in other words, something other than a retirement plan. Entertainers should consider these arrangements because it gives them the opportunity to:

• Control their cash flow.
• Defer revenues until a year when they fall into a lower tax bracket.
• Delay paying taxes on income that they don’t have an immediate need for.
• Earn tax-deferred interest on the deferred income.
• Set aside a “rainy day” fund.
• Plan a comfortable retirement for when their celebrity has ended.
• Save that money to use for future needs, such as a future child’s education, travel, or to fund a new business.

Because there is a penalty for early withdrawal in almost all circumstances, many entertainers use structured celebrity endorsements as forced savings plans. The threat of a 20% penalty can keep them honest and away from those earnings until they truly need it.

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Structured celebrity endorsements are unique planning opportunities for athletes, entertainers, and public figures of all types. Those endorsement revenues can add up over time, and instead of collecting them now when you have other earnings supporting you, you can take advantage of the tax code and save for your future goals. If you have any questions about how these agreements work, or want to discuss your current situation, get in contact with us. We have a group of professionals with an in-depth understanding of the entertainment industry, and we would love to hear from you. We look forward to speaking with you soon.